Pepperdine Policy Review

Volume 6 Pepperdine Policy Review Article 12

5-27-2013

The Role of Health Care in a Democratic Capitalist Society

Barbi Appelquist Pepperdine University, School of Public Policy, [email protected]

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Recommended Citation Appelquist, Barbi (2013) "The Role of Health Care in a Democratic Capitalist Society," Pepperdine Policy Review: Vol. 6 , Article 12. Available at: https://digitalcommons.pepperdine.edu/ppr/vol6/iss1/12

This Article is brought to you for free and open access by the School of Public Policy at Pepperdine Digital Commons. It has been accepted for inclusion in Pepperdine Policy Review by an authorized editor of Pepperdine Digital Commons. For more information, please contact [email protected], [email protected], [email protected]. Pepperdine Public Policy Review 2013

The Role of Health Care in a Democratic Capitalist Society

Barbi S. Appelquist, Esq.

On March 23, 2010, President Barack Obama signed into law The Patient Protection and

Affordable Care Act, commonly known as “Obamacare”. The Patient Protection and Affordable

Care Act (“Affordable Care Act”) was enacted by a consensus reached by the members of each of the House of Representatives and the Senate as required by Article III of the Constitution.

Did the government’s hand reach too far into the health care economy of our nation? Should the government limit its involvement to the regulation of health care professionals? Is health care a good that is best allocated in a free market with liberal traditions? Or, as required by the

Affordable Care Act, should health care insurance be mandated to provide for equal access to health care? To answer these questions, this paper will focus on the Affordable Care Act’s general application to the capitalist tradition as framed by Adam Smith and Milton Friedman, with a limited analysis of the federal mandate to purchase individual health insurance. This paper is limited in its scope to provide an analysis of the law using the classical framework of

Adam Smith and Milton Friedman.

I. Overview of Health Care System and the Patient Protection and Affordable Care Act

On June 28, 2012, the Supreme Court delivered its opinion on the constitutionality of the

Patient Protection and Affordable Care Act in Department of Health and Human Services v.

Florida . The main question the Supreme Court answered was whether Congress had sufficient authority under Article I of the Constitution to mandate minimum coverage (Department of

Health and Human Services v. Florida, 2012). The Constitution, on a strict textual basis alone, Pepperdine Public Policy Review 2013 provides neither the right to health care nor the right to health insurance. With respect to the individual mandate, the majority of the Supreme Court justices did not follow Justice Antonin

Scalia’s interpretive approach to strictly interpret the language of the Constitution and the language of the Affordable Care Act (Department of Health and Human Services v. Florida,

2012). Justice Scalia, in his dissent, stated that health care is not expressly incorporated into the federal government’s area of legislation (Department of Health and Human Services v. Florida

2012, pp. Post 1-65). Instead, the majority followed Justice Stephen Breyer’s interpretative approach and considered other factors, including, among other things the constitutional text, history, tradition, precedent, purpose, consequences, and legislative intent, to find that health care and, specifically, the mandate, is constitutional with the limiting interpretation that the mandate acts as a tax (Department of Health and Human Services v. Florida, 2012).

Did the government’s hand reach too far into the health care economy of our nation?

Should the government limit its involvement to the regulation of health care professionals? Is health care a good that is best allocated in a free market with liberal traditions? Or, as required by the Affordable Care Act, should health care insurance be mandated to provide for equal access to health care? To answer these questions, this paper will focus on the Affordable Care

Act’s general application to the capitalist tradition as framed by Adam Smith and Milton

Friedman, with a limited analysis of the federal mandate to purchase individual health insurance.

The analysis provided in this paper will provide support for this more interpretative approach to constitutional analysis with a focus on the economic theory and rationale of exceptions to a strict free market economic system.

A. U.S. Health Care System Pepperdine Public Policy Review 2013

The American health care system has transitioned from a free-market, direct payer for services system to a fragmented, multiple payer, multiple provider system. Health care is colloquially defined in a variety of ways and, for the purposes of this essay, the term “health care” includes the following components: (1) providing medical services to treat and/or cure existing disease or illness (e.g., surgery to remove a known tumor, etc.); (2) providing medical services to prevent future disease or illness (e.g., vaccinations, surgery to prevent hereditary cancer, etc.); (3) providing medical services for routine health and wellness needs (e.g., vaccinations, annual exams, etc.); (4) researching, developing, testing, manufacturing, and distributing prescription medicines; and (5) providing insurance to patients via individual plans and employer-sponsored plans. 1 The American Hospital Association and Blue Cross are the forefathers of the American health care system (Bodenheimer & Grumbach, 2012, p. 39). Unlike

European health care systems that were designed by governments for patients, the American system was designed by the health care providers for the medical community-at-large and, in this way, has been driven more by capitalist motives of wealth creation than by charitable purposes

(Bodenheimer & Grumbach, 2012, p. 39).

To understand the American system, one needs to understand what existed when the

United States was formed in the mid-1700s. The first medical school in the colonies was opened in 1765 by the University of Pennsylvania and focused on, “promoting a curriculum that emphasized the therapeutic powers of blood- letting and intestinal purging” (Bodenheimer &

Grumbach, 2012, p. 74). At this time, other medical groups existed, including midwives and homeopaths. Medical training improved when the Johns Hopkins University School of Medicine opened in 1893 with a high standard of medical education that continues today, including

1 For a general analysis of each of these components, see Bodenheimer, T., & Grumbach, K. (2012). Understanding health policy: A clinical approach (6th ed.). New York: McGraw-Hill Medical. Pepperdine Public Policy Review 2013

a 4-year course of study at the graduate school level, competitive selection of students, emphasis on the scientific paradigms of clinical and laboratory science, close linkage between a medical school and a medical center hospital, and cultivation of academically renowned faculty (Bodenheimer & Grumbach, 2012, p. 74).

This basic academic approach to medical services continued until World War II. “Medical science and the provision of medical care were both very different in the United States before

World War II then they are now” (Friedman, 2008, p. xi;, Foreward of Gratzer, The Cure ). The discovery of penicillin in 1941 changed the field of medical science; physicians could now cure disease. Doctors delivered medical care directly to a patient in a relatively free market as a direct fee-for-service between the patient, as a consumer, and the medical provider, as the supplier of services (Friedman, 2008, p. xi; Foreward of Gratzer, The Cure ). “The essence of the process was the consensual relationship between the patient and the physician” (Friedman, 2008, xi;

Foreward of Gratzer, The Cure ). Health insurance companies did not exist and “[m]edical insurance covered catastrophic events, not everyday care” (Friedman, 2008, p. xi; Foreward of

Gratzer, The Cure ). What changed in the market? World War II resulted in price and wage controls that led to increased competition for skilled labor. To compete for skilled labor, employers could now include tax-exempt medical care in their compensation packages

(Bodenheimer & Grumbach, 2012, p. 8-9; Friedman 2008 xi, Foreward of Gratzer, The Cure ).

By 2010, the health care system was broken; supply and demand were not meeting at the right price. The inclusion of health care insurance was not universal and costs were shared by employers, employees, and physicians. As Parija Kavilanz’s CNNMoney story highlights, the cost of physicians increased and compensation for given services decreased, and as a result

[d]octors, especially those operating private practices, said their financial hardship is increasing, making it ‘harder for them to earn a decent living,’ according to a new survey of 673 physicians across 29 specialties by MDLinx, a medical reference website for physicians. (Kavilanz, 2008). Pepperdine Public Policy Review 2013

Unfortunately, “[w]hile the rest of the economy has moved forward, American health care is stuck in an outmoded economic model, dating back to the Second World War” (Gratzer, 2008, p.

5). The Affordable Care Act aims to revolutionize this American health care economic model.

B. Major Components of the Patient Protection and Affordable Care Act

The Affordable Care Act of 2010 has two major components. First, the Act expands health insurance coverage to all individuals, regardless of capacity to pay (Affordable Care Act,

2010). Second, the Act changes the organization and delivery of health care via the use of insurance exchanges (Affordable Care Act, 2010). Specifically, the law sets up a variety of reforms to be enacted over the next several years, including the ban on an insurance company’s denial of health care coverage to individuals with pre-existing conditions and a ban on maximum benefits paid for individuals and the coverage of preventative care services at no additional cost to individuals. The Affordable Care Act’s most publicly controversial component is the health insurance mandate, requiring individuals to purchase coverage either through their employers or a state-sponsored exchange. Some view this as a benefit to the existing health care system because it increases the pool of people who pay for health insurance coverage. Others view it as excess government interference in the health insurance market. Beginning in 2014, those who do not have individual insurance coverage will be required to pay a fine in the form of a tax (Roy,

2012). In addition, the Affordable Care Act authorizes Medicare to create an Accountable Care

Organization (“ACO”) program. (Bodenheimer & Grumbach, 2012, p. 69). The ACO program includes Health Maintenance Organizations (HMOs) and providers in more flexible arrangements. The goal of this program is to provide “more organized, integrated care structures that can improve quality and ‘bend the cost curves’” (Bodenheimer & Grumbach, 2012, p. 70).

The Affordable Care Act also provides a minimum standard of services for those with mental Pepperdine Public Policy Review 2013

illness and/or substance abuse. Thus, the Affordable Care Act provides a mechanism for health

care for all, especially for those who need it most.

II. Democratic Capitalism & Health Care

In an ideal world, health care would be “individual and portable” (Gratzer, 2008, p. 9).

Individuals would have perfect knowledge about their current and future health care needs. In addition, individuals would have perfect knowledge about health care products, from insurance coverage to pharmaceuticals, would be available for the consumer at a reasonable cost and these goods could be purchased. Also, individuals would choose behaviors conducive to good health and preventative services would be utilized. Ideally, the overall cost of health care would decrease. Unfortunately, not all individuals do what is in their best long-term interest.

Consumers are myopic. For this reason, Adam Smith and Milton Friedman’s economic theories can be applied to better explain Congressional action to expand national health care options.

Although neither political economist articulated health care as a covered and permissible reason for government intervention in the marketplace, both gentlemen understood the limits of the free market and the expanding needs of individual society.

A. Adam Smith, Health Care, and the Free Market Economy

Adam Smith, considered by most to be the father of capitalism, believed that government had a limited role in the economy. Although health care in the 18 th Century was fundamentally

different than modern health care, three specific topics discussed in Adam Smith’s Wealth of

Nations are relevant to the Affordable Care Act. First, with the Affordable Care Act, does the

government provide one of the three limited services: defense, administration of justice, or

public work? Secondly, how does health care generally impact the economy? And thirdly, is the

individual mandate government coercion or in the self-interest of individuals? Pepperdine Public Policy Review 2013

According to Smith, “the productive powers of labour led to the improvement of society”

(Smith, 1776/1986, p. 159). As useful and productive laborers increased, so did the amount of production. Did Adam Smith include the general health of laborers in his analysis? If the laborers’ health increased or decreased would the amount of useful and productive labor also increase or decrease? In the 1700’s, if an individual fell ill, he was less likely to seek a physician than to seek a home remedy. As Paul Starr details in his book, The Social Transformation of

American Medicine (1982) , the “belief that ordinary people were fully competent to treat illness had been expounded before by John Wesley, the founder of English Methodism, in a book of medical advice called Primitive Physic , originally published in 1747” (p. 33). A person would thus repair himself at home and return to work.

1. Government Intervention to Provide Certain Services

Adam Smith’s Wealth of Nations (1776/1986) did not expressly identify health care as a program requiring government intervention. Despite this, can a reasonable argument be made that health care of the laborers is, like education, a necessary public work in which the government should participate? Adam Smith did see a necessary role of government in unprofitable but necessary services in commerce. Adam Smith believed that the government’s involvement should be limited to providing for the defense of the nation, a system of law and order, and essential public works.

According to the system of natural liberty, the sovereign has only three duties to attend to; […] first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, a far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals to erect and maintain; because the profit could never repay the expence [sic] to any individual or small number of individuals, thought it may frequently do much more than repay it to a great society (Smith, 1776/1986, p. 289, emphasis added. See also p. 298).

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With respect to essential public works, Adam Smith enumerated the following public

institutions:

After the public institutions and public works necessary for the defence [sic] of the society, and for the administration of justice […] the other works and institutions of this kind are chiefly those for facilitating the commerce of the society, and those for promoting the instruction of the people (Smith, 1776/1986, p. 298).

An argument can be made that health care is an institution that “facilitates the commerce of the

society.” Smith considered first “those which are necessary for facilitating Commerce in

general” (Smith, 1776/1986, p. 298). He considered public roads, depth and supply of water for

navigable canals, and the post-office (Smith, 1776/1986, pp. 298-299). However, he emphasized

that those public works which cannot generate sufficient revenue for their operations but “of

which the convenience is nearly confined to some particular place or district, are always better

maintained by a local or provincial revenue, under the management of a local and provincial

administration” (Smith, 1776/1986, p. 299). Our modern lawmakers considered this issue when

they required state insurance exchanges to administer to local health care needs. Adam Smith

concluded his analysis on public works supporting the use of general tax revenues to support

those areas that do not generate sufficient revenue:

When the institutions or public works which are beneficial to the whole society, either cannot be maintained altogether by the contribution of such particular members of the society as are most immediately benefitted by them, the deficiency must in most cases be made up by the general contribution of the whole society (Smith, 1776/1986, p. 312).

Now, most can receive the services of public works because public funds are available.

However, the average quality of health care might decline, as is the case in comparisons between

the British National Health Service (NHS) and the American health care system. 2

2. How the American Health Care Market Impacts Political Economy

2For comparisons between the American and British health care systems, see Bodenheimer, pp. 34-39, 44-46, 175-176, 179-180. Pepperdine Public Policy Review 2013

During Adam Smith’s rise to influence, his study of political economy provided a method to analyze how an individual state developed its economy. The idea evolved over the 19th and

20th centuries to include analyses of government-centric and market-centric eras in American,

European, and global history. This idea can be broken down into components or sectors to reflect a government’s involvement in the economy. This section will focus on how an individual values a medical or health care good in commerce. What is the real measure of value in the medical economy? According to Smith, “[l]abour […] is the real measure of the exchangeable value of all commodities” (Smith, 1776/1986, p. 175). Should health insurance be considered a commodity? Smith argued that one must take into account the “different degrees of hardship endured, and of ingenuity exercised” (Smith, 1776/1986, p. 176). Moving towards the pricing of general goods, Smith posited that the price of all goods and services is based on the cost of and to the laborer, with an emphasis on the general well-being of the laborer:

Equal quantities of labour, at all times and places, may be said to be of equal value to the labourer. In his ordinary state of health, strength and spirits; in the ordinary degree of his skill and dexterity, he must always lay down the same portion of his ease, his liberty and his happiness. The price which he pays must always be the same, whatever may be the quantity of goods which he receives in return for it (Smith, 1776/1986, p. 178).

If the real cost of maintaining a laborer’s “ordinary state of health, strength and spirits” increases, then the real price of goods he produces will also increase. “In the advanced state of society, allowances of this kind, for superior hardship and superior skill, are commonly made in the wages of labour; and something of the same kind must probably have taken place in its earliest and rudest period” (Smith, 1776/1986, p. 181). The wage rate incorporates the a laborer’s skill level and hardship of the work to be completed.

Adam Smith dedicated Chapter VIII in Book I of the Wealth of Nations to the issue of the natural rate of wages (Smith, 1776/1986, p. 194). “What are the common wages of labour depends everywhere upon the contract usually made between those two parties, whose interests Pepperdine Public Policy Review 2013 are by no means the same” (Smith, 1776/1986, p. 195). As aforementioned, health insurance coverage was an individual payer system before wage controls of World War II. Post-war, employers began to include health care insurance as a tax-favorable fringe benefit to attract workers. Over the past seventy years, health care insurance became an expected part of one’s compensation package, especially for highly-skilled labor. Thus, has health care insurance coverage for an individual now been incorporated into the “natural rate” of labor? Alternatively, the new natural rate of labor also includes health care costs because of the use of health care to maintain the laborer: “[a] man must always live by his work, and his wages must at least be sufficient to maintain him” (Smith, 1776/1986, p. 197).

Adam Smith believed that higher natural wages were better for society as a whole (Smith,

1776/1986, p. 203). The wealth of the whole nation increased with this increase of real, or natural, wages:

Servants, labourers, and workmen of different kinds make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconvenience to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged (Smith, 1776/1986, p. 203).

The poor require health care coverage because they cannot afford the costs of basic necessities, let alone the gap costs of preventative maintenance and catastrophic emergency. Adam Smith detailed the role of poverty and general health: children of “the common people” had higher mortality rates because of the inability to “afford to tend them with the same care as those of a better station” (Smith, 1776/1986, p. 204). Similarly,

[t]he wages paid to journeymen and servants of every kind must be such as may enable them, one with another, to continue the race of journeymen and servants, according as the increasing, diminishing, or stationary demand of the society may happen to require. (Smith, 1776/1986, pp. 204-205). Pepperdine Public Policy Review 2013

Thus, workers’ wages must be at a sufficient level to maintain their sustenance.

Is health care a profitable industry? The level of profit depends on the type of health care

product, the type of person receiving care, and the person providing care. Health care insurance

for the elderly and chronically ill is generally not profitable, so the government has, in the past,

intervened to provide these essential services with the institutions we know as Medicare and

Medicaid. The health care industry is significant and pieces of the industry can be largely

profitable at small periods of time. With respect to health insurance premiums and for-profit

insurance companies, one question is how are profits being distributed? For example, when an

individual with a pre-existing condition pays higher premium even though the condition may be

resolved, where do those premium payments go? Are they invested for future disease treatment

or distributed at the end of the year as a profit to the health insurance company’s stakeholders?

Thus, in theory, Adam Smith may support the general idea of a national health insurance

program, even though it does not fit perfectly into one of his enumerated examples of a public

work because there is a demand for the services that the market will not otherwise provide.

3. Is the Individual Mandate Coercion or in the Self-Interest of Individuals?

Adam Smith was worried about new laws and regulations concerning commerce that

originated from the business sector. How would he feel about the Affordable Care Act? The

individual mandate represents a compromise made by the Obama administration to get insurance

companies on board with providing insurance to those who likely need medical care the most.

Adam Smith urged caution:

The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it (Smith, 1776/1986, p. 227). Pepperdine Public Policy Review 2013

The American public may not know how the law, once enacted, provides care for those patients

who the insurance companies would have otherwise rejected. Friedman agreed with Smith that it

is the responsibility of the rest of us to establish a framework of law such that an individual in

pursuing his own interest is;

‘led by invisible hand to promote an end which was no part of his intention .... by pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good’ (Friedman, 2002, p. 133, citing Adam Smith, 1776/1986, Wealth of Nations , p. 421).

If the health care system was designed to encourage and support preventative care through an increase in funding for primary care physicians and an education of healthy choices that prevent disease (e.g., diet, exercise), then America’s health care costs could be substantially lowered

(Bodenheimer & Grumbach, 2012, pp. 44-55). Adam Smith did not expressly advocate for government-funded health care for all individuals. However, he argued for government support of certain public works to facilitate commerce. Should a national health care plan be one of those public works? A reasonable argument could be made in the affirmative. Smith recognized that, in a free enterprise system, there is a need for certain products with a low profit margin and/or too high of a cost such that no reasonable person would engage in such business. Health care for the chronically ill or with a pre-existing condition is one such system.

B. Milton Friedman, Health Care, and Limitations on Government Intervention

Milton Friedman believed that a free society requires an economy without government intervention. However, government intervention was possible where such intervention was necessary because of market imperfections, including monopolies, neighborhood effects, or paternalism.

Economic arrangements play a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is itself a component of freedom broadly understood, so Pepperdine Public Policy Review 2013

economic freedom is an end in itself. In the second place, economic freedom is also an indispensible means toward the achievement of political freedom. (Friedman, 2002, p. 8).

How should the economic arrangements about health care be made for millions of people? Who

should decide how to coordinate national health care: insurance companies, medical providers, individual patients, the state government, or Congress? Friedman argued that there were two ways to organize the “economic activities of millions. One is central direction involving the use of coercion – the technique of the army and of the totalitarian state. The other direction is voluntary co-operation of individuals – the technique of the market place” (Friedman, 2002, p.

13). Thus, Friedman would argue that an open health care market is the best way to coordinate the economic activities of millions of Americans.

1. The Health Care Market is Imperfect

An essential rule to this “voluntary co-operation” is that “both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed ”

(Friedman, 2002, p. 13). However, the health care economy is not a perfect market for capitalism because, among other things, it is not always a voluntary exchange and households and individuals are not perfectly informed. Health care decisions impact a lifespan, not a moment in a transaction. These two imperfections, in addition to others, will be discussed in more detail below.

Friedman, in his Foreward to David Gratzer’s book The Cure: How Capitalism Can Save

American Health Care , posited that the developments of medical practice are not necessarily the

results of medical science:

It is tempting to regard the developments in medical practice as the direct consequence of the developments in medical science, the high cost and bureaucratization of practice reflecting for the most part the high cost of the drugs, machines, and procedures that are the product of medical science. This view is a fallacy (Friedman in Gratzer, 2008, pp. xii-xiii).

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In addition, Friedman argued that a free market does not necessarily eradicate the need for government. “On the contrary, government is essential both as a forum for determining the

‘rules of the game’ and as an umpire to interpret and enforce the rules decided on” (Friedman,

2012, p. 15). The Affordable Care Act is a detailed account of the new rules of the game, including the coverage for mental illness and substance abuse and the abolition of lifetime and annual maximum limits, and creates a structure whereby these new rules can be enforced on a local level. “What the market does is to reduce greatly the range of issues that must be decided through political means, and thereby to minimize the extent to which government need participate directly in the game” (Friedman, 2002, p. 15). However, has government reduced the range of issues to be decided through political means or created new issues that government must now be involved?

The Affordable Care Act’s requirement that all individuals acquire health insurance or face a penalty is a coercive requirement and, as a coercive requirement, Friedman would argue it has no place in our political economy. “Political freedom is the absence of coercion of a man by his fellow men” (Friedman, 2002, p. 15). Thus, health insurance in America was initially provided to individuals as a benefit in addition to wages because of the government’s freeze on wages. Since World War II, full-time employees could be covered under their employer’s health plan. However, the cost of health insurance premiums has skyrocketed and many businesses can no longer support the extra cost of health insurance. According to a 2009 study by the Kaiser

Family Foundation, the average annual premium for a family of four is $13,375 (Fritze, 2009).

This amount divided by 2000 hours, the number of hours worked in a year by a full-time 40-hour a week employee, amounts to an extra $7/hour of cost borne by the employer (Fritze, 2009). Pepperdine Public Policy Review 2013

Businesses can no longer support this fringe benefit, but can the government, and essentially taxpayers, bear the cost?

However, Friedman’s basic proposition was therefore that government should not intervene in the market unless “political channels are preferable” (Friedman, 2002, p. 25). “The role of government . . . is to do something that the market cannot do for itself, namely, to determine, arbitrate, and enforce the rules of the game” (Friedman, 2002, p. 27). Political channels are more preferable in three cases: (1) when the government must act as the rule-maker and the umpire, (2) when a technical monopoly or other market imperfections exists which limits the freedom in the marketplace, or (3) when neighborhood effects are so severe that government interference is required. Friedman additionally posited that the roles of government in a free society are

to provide a means whereby we can modify the rules, to mediate differences among us on the meaning of the rules, and to enforce compliance with the rules on the part of those few who would otherwise not play the game (Friedman, 2002, p. 25).

Thus, government’s role is to provide citizens with a way to create, facilitate, and administer the rules of the marketplace.

The health care market is not a perfectly free and competitive market. First, emergency care is not voluntarily provided. If you get hit by a car or injured in a plane crash and survive, you will likely receive medical care. The involvement of an individual in the health care market can be voluntary if on a preventative basis or involuntary when on an emergency, trauma, or catastrophic basis.

[T]he organization of economic activity through voluntary exchange presumes that we have provided, through government, for the maintenance of law and order to prevent coercion of one individual by another, the enforcement of contracts voluntarily entered into, the definition of the meaning of property rights, the interpretation and enforcement of such rights, and the provision of a monetary framework (Friedman, 2002, p. 27). Pepperdine Public Policy Review 2013

Friedman further explained “[e]xchange is truly voluntary only when nearly equivalent

alternatives exist. Monopoly implies the absence of alternatives and thereby inhibits effective

freedom of exchange” (Friedman, 2002, p. 28). When an individual is unconscious and

receiving medical care, at that moment, the medical providers have a monopoly concerning the

care of the patient. Health care, especially at times of emergency, operates in a monopoly

market:

The essence of a competitive market is its impersonal character. No one participant can determine the terms on which other participants shall have access to goods or jobs. All take prices as given by the market and no individual can by himself have more than a negligible influence on price though all participants together determine price by the combined effect of their separate actions (Friedman, 2002, p. 120).

According to Friedman (2002), the three sources of monopoly are “‘technical’ considerations,

direct and indirect governmental assistance, and private collusion” (p. 128). When an individual

is unconscious, he or she is obligated to pay for the care received. Prior to the Affordable Care

Act, when an individual exhausted his or her lifetime and annual maximum benefits and was no longer able to pay for medical care but was still receiving or needing care, the government and the taxpayers would pay the cost. Beginning in 2014, such limitations on coverage are now prohibited under the Affordable Care Act. 3

Consumers of health care services have imperfect knowledge. “[T]he central principle of

a market economy is co-operation through a voluntary exchange. Individuals co-operate with

others because they can in this way satisfy their own wants more effectively” (Friedman, 2002,

p. 166). Everyone wants perfect health but, mere participation in the health care economy does

not provide perfect health. Individuals purchase health insurance in the event their health needs

require medical care. No individual wants to be ill. Some individuals are genetically

3 These limitations are specifically prohibited under Section 2711 of the Public Health Service Act, incorporated into section 9815 of the Internal Revenue Code by section 1563(f) of the Patient Protection and Affordable Care Act, Public Law 111-148. Pepperdine Public Policy Review 2013 predisposed to certain diseases (e.g., cancer, heart disease, diabetes, etc.) based on hereditary or environmental factors. But, most individuals do not actively choose medical care services to treat disease until a symptom presents itself. Friedman believed “that payment in accordance with product has been, and, in large measure, still is, one of accepted value judgments or institutions” (Friedman, 2002, p. 167). Only recently has genetic testing become more affordable so that individuals can choose to treat a disease before it makes a clinical presentation.

And yet, a genetic predisposition does not make absolute certainty.

In addition, a fundamental rule of a free economy is that profit motives drive companies.

In a free market economy

there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud (Friedman, 2002, p. 133).

For example, preventative care is more efficient, but it requires upfront costs which individuals are not willing to choose, despite it being the best choice over a life span. However, individuals are myopic. Thus, the health care market is imperfect and, as such, government intervention is possible.

2. Neighborhood Effects and Paternalism Justify Government Intervention

As aforementioned, government intervention is justifiable when the market is imperfect.

Market imperfections can be mitigated or exacerbated by neighborhood effects. Sometimes, consumers need government intervention to nudge them into making better choices. But who should decide what these better choices are? For these reasons, Friedman would consider the role of government important in the current health care economy, with reservations about the

United States becoming, disproportionately, a welfare state. Although he would not agree with Pepperdine Public Policy Review 2013 the Affordable Care Act’s individual mandate requirement, Friedman could reasonably recognize the limits of the existing health care market and the need for government intervention.

As Freidman argued, “strictly voluntary exchange is impossible [ . . . ] when actions of individuals have effects on other individuals for which it is not feasible to charge or recompense them. This is the problem of ‘neighborhood effects’” (Friedman, 2002, p. 30). When many individuals with a diverse spread of health needs, from no care to regular chronic care, are pooled together into an insurance plan, the average premium cost is lower because the risk to the health insurance company is spread amongst the various medical needs. Unfortunately, the individuals who rarely need or use insurance are effectively paying for the care of those with chronic needs. This is the economic model of the insurance industry. Sometimes, the chronic conditions are a direct result of individual discipline or the lack thereof (e.g., obesity, Type II diabetes, certain forms of lung cancer, etc.), sometimes genetic predisposition (e.g., some forms of breast cancer), and sometimes environmental or occupational factors (e.g., some forms of childhood leukemia, black lung disease, etc.).

Is government intervention possible on paternalistic grounds? What is the difference between coercion by the state and encouragement of better choices?

The paternalistic ground for governmental activity is in many ways the most troublesome to a liberal; for it involves the acceptance of a principle – that some shall decide for others – which he finds objectionable in most applications and which he rightly regards as a hallmark of his chief intellectual opponents, the proponents of collectivism in one or another of its guises, whether it be communism, socialism, or a welfare state” (Friedman, 2002, p. 34).

The health care market is a very personal market. Friedman (2002) posited, “an impersonal market separates economic activities from political views and protects men from being discriminated against in their economic activities for reasons that are irrelevant to their productivity” (p. 21). An individual with early onset Alzheimer’s may be passed up on the promotion for fear of his productivity in 10 years. Cancer treatment in the 1970’s required Pepperdine Public Policy Review 2013 round-the-clock care for intravenous chemotherapy. Modern cancer treatments are as simple as taking a pill with almost no immediate side effects and no reduction in productivity. Times have changed. The American health care market has not.

What was Friedman’s solution?

For fiscal policy, the appropriate counterpart to the monetary rule would be to plan expenditure programs entirely in terms of what the community wants to do through government rather than privately, and without any regard to problems of year-to-year economic stability. […] and to avoid erratic changes in either governmental expenditures or taxes (Friedman, 2002, p. 79).

Does the “community” want health care through the government? An argument could be made that the community has a history of wanting health care through the government with programs such as Medicare and Medicaid in existence for over fifty years. The United States was the only industrialized nation to provide universal health care for a limited age group of its citizens. Now, is the American community expressing a desire to extend this coverage to all Americans?

Should Friedman’s analysis of the education market extend to health care? Friedman provided an analysis of education where both public and private schools compete for students in the education economy with the use of vouchers. Friedman (2002) argued that the rationale for government spending in education was two-fold: neighborhood effects and paternalism (p. 85).

These two rationales “have very different implications for (1) general education for citizenship, and (2) specialized vocational education” (Friedman, p. 86). The government action that was justified by the neighborhood effect of a desirable general education for citizenship was a requirement “that each child receive a minimum amount of schooling of a specified kind”

(Friedman, p. 86). The cost could be borne directly by families and the government could subsidize those who could not pay. This is similar to how the Affordable Care Act requires an individual mandate for all to obtain health insurance, but the government will subsidize those who are unable to pay. In implementation, the government has paid for all public schooling, Pepperdine Public Policy Review 2013

both primary and additional schooling. As Friedman noted, “[t]he costs are paid because this is

the only feasible means of enforcing the required minimum” (Friedman, p. 88).

However, Friedman argued that the nationalization of the administration of schooling was

not justifiable under the neighborhood effects argument. “The role of government would be limited to insuring that schools met certain minimum standards, such as the inclusion of a minimum common content in their programs” (Friedman, 2002, p. 89). As Friedman cited D.S.

Lees in his comparison of the nationalization of health care in the United Kingdom and the concern with the nationalization of public schooling, “[f]ar from being extravagant, expenditure on NHS has been less than consumers would probably have chosen to spend in a free market”

(Friedman, 2002, p. 95, citing D.S. Lees, “Health Through Choice,” Hobart Paper 14 (London:

Institute of Economic Affairs, 1961), p. 58). Friedman concluded, “[g]overnment intervention

might therefore be rationalized on grounds both of ‘technical monopoly,’ insofar as the obstacle

to the development of such investment has been administrative costs, and of improving the

operation of the market, insofar as it has been simply market frictions and rigidities” (2002, p.

104). Friedman continued,

[t]he desideratum is not to redistribute income but to make capital available at comparable terms for human and physical investment. Individuals should bear the costs of investment in themselves and receive the rewards. They should not be prevented by market imperfections from making the investment when they are willing to bear the costs. One way to achieve this result is for government to engage in equity investment in human beings. (p. 105).

Although Friedman wrote with respect to government spending on higher education, can these

words be transferred to the issue of medical care? If the government invests in human capital

and an individual is able to obtain treatment of a disease they otherwise would not be able to

afford, the individual can now return to work and, ideally, continue to be a productive member of

society. Pepperdine Public Policy Review 2013

Friedman’s writings and speeches did not support government intervention unless

“political channels” were preferable because certain areas “cannot be handled through the market

at all, or can be handled only at so great a cost” (Friedman, 2002, p. 25). The market proved

unwilling to handle health care coverage for the poor and chronically ill. Imperfections in the

health care market make it severely unprofitable to provide health insurance only to those who

really need it. Those who do need the medical care, especially chronic or catastrophic care, are

unable to afford it. “Six out of ten personal bankruptcies in the United States are directly related

to people’s medical bills – and of that group, three out of four piled up unaffordable debts even

though they had health insurance” (Daschle, 2010, pp. 10-11).

Friedman also had severe reservations about the government’s role in licensing

professionals. “In the first place, licensure is the key to the control that the medical profession

can exercise over the number of physicians” (Friedman, 2002, p. 150). With a restriction on the

supply of medical professionals, the market is not able to operate freely. The American Medical

Association is a “trade union that can limit the number of people who can enter” (Friedman, p.

150). Also, in the United States, there is a general view that “people should get only the

‘optimal’ medical service” (Friedman, p. 153). Friedman argued that this view “always leads to

a restrictive policy, a policy that keeps down the number of physicians” (Friedman, p. 153).

Bodenheimer articulates further how the medical profession and training of medical professional

has shifted the equilibrium supply and demand of the medical economy. Approximately one- third of registered physicians are primary care physicians, even though the demand for such physicians is closer to one half of all medical services (Bodenheimer & Grumbach, 2012, p. 81).

Trained physicians devote a considerable amount of their time to things that might well be done by others. The result is to reduce drastically the amount of medical care. The relevant average quality of medical care, if one can at all conceive of the concept, cannot be obtained by simply averaging the quality of care that is given; that would be like judging the effectiveness of medical Pepperdine Public Policy Review 2013

treatment by considering only the survivors; one must also allow for the fact that the restrictions reduce the amount of care. (Friedman, p. 156).

Thus, Friedman argued that even though licensing may provide a certain minimum amount of assurance to patients with respect to the quality of a physician, it is not a sufficient reason for government interference since it displaces the market and medical care. Friedman presented

“alternatives to the present organization of practice” by referencing “medical teams” and arguing that other individuals should be free to practice medicine, in many ways the way that physician assistants, registered nurses, nurse practitioners, and midwives are permitted to practice

(Friedman, p. 156).

Milton Friedman, as an economist, understood how government spending was justified to stimulate employment, but in effect created a welfare state that was unsustainable. Friedman would likely see this increase in government involvement in the health care economy as an increase of the welfare state. Government expenditures have increased, according to Friedman, because of “the widespread acceptance by intellectuals of the belief that government should play a larger role in economic and private affairs; the triumph, that is, of the philosophy of the welfare state” (Friedman, 2002, pp. 78-79).

With respect to the federal mandate that every individual obtain health insurance,

Friedman would likely, at first impression, view such a requirement as being against a fundamental understanding of a liberal market because of the mandate’s effect on income.

“Property rights are matters of law and social convention. As we have seen, their definition and enforcement is one of the primary functions of the state” (Friedman, 2002, p. 162). Friedman analyzed the distribution of income by looking at “the justification for state intervention to promote equality” and the “positive and scientific: what has been the effect of the measures actually taken” (Friedman, 2002, p. 161)? With respect to state intervention to promote equality, Pepperdine Public Policy Review 2013

Friedman posited: “[g]iven individuals whom we are prepared to regard as alike in ability and initial resources, if some have a greater taste for leisure and others for marketable goods, inequality of return through the market is necessary to achieve equality of total return or equality of treatment” (Friedman, 2002, p. 162). Friedman continued,

[t]hough much of the inequality of income produced by payment in accordance with product reflects ‘equalizing’ differences or the satisfaction of men’s tastes for uncertainty, a large part reflects initial differences in endowment, both of human capacities and of property. This is the part that raises the really difficult ethical issue (2002, p. 164).

Thus, Friedman believed that our liberal society, open market economy, and our democratic approach to resolving issues were the most effective.

However well meaning, unintended effects of a policy can harm the economy rather than help it. “The humanitarian and egalitarian sentiment which helped produce the steeply graduated individual income tax has also produced a host of other measures directed at promoting the

‘welfare’ of particular groups” (Friedman, 2002, p. 176). Friedman would likely view the goal of promoting the welfare of those who are currently uninsured as one of these programs. What could some of the effects be? In his analysis of “Old Age and Survivor’s Insurance,” or OASI which is now more commonly known as Social Security Insurance, he argued that these programs involve “a large-scale invasion into the personal lives of a large fraction of the nation, without, so far as [he could] see, any justification that is at all persuasive, not only on liberal principles, but on almost any other” (Friedman, 2002, p. 182).

According to Friedman, OASI consisted of three elements:

(1) a requirement that a wide class of persons must purchase specified annuities,

(2) a requirement that the annuity must be purchased from the government; and

(3) a scheme for redistributing income, insofar as the value of the annuities to which people are entitled when they enter the system is not equal to the taxes they will pay. (2002, p. 183). Pepperdine Public Policy Review 2013

Friedman’s analysis saw trivial advantages to this compulsion and coercion effort of the state.

“One possible advantage of nationalizing the provision of annuities is to facilitate the enforcement of compulsory purchase of annuities. However, this seems a rather trivial advantage” (Friedman, 2002, p. 183). A similar argument could be made with respect to the compulsory nature of the national mandate to purchase health insurance and that health insurance should be made available to every possible variation of consumer. Friedman saved the bulk of his analysis for the compulsory purchase of annuities, which can be used to analyze the compulsory nature of the purchase of health insurance. “One possible justification for such compulsion is strictly paternalistic. People could if they wished decide to do individually what the law requires them to do as a group” (Friedman, 2002, p. 187). However, Friedman’s argument that the government views consumers as “separately short-sighted and improvident” does not stand the same amount of scrutiny when applied to health care insurance.

If the Affordable Care Act had been deemed unconstitutional in its entirety, insurance companies would return to the old way of doing business. In that system, when an individual who sought health insurance was considered an undesirable consumer, this individual would be rejected and uninsured; the individual either dying or becoming destitute, and the taxpayer would eventually pay the medical bills. Before the Affordable Care Act, health insurance companies could legally raise the initial premium and then continue to raise premiums on a quarterly and/or annual basis for those with pre-existing conditions, even if the consumer had no present or recent needs for treatment. Also, prior to the Affordable Care Act, insurance companies instituted annual and lifetime maximum benefit limits. If a patient’s costs for medical care that were paid by the insurance company exceeded these limits, the insurance company could terminate insurance coverage. Similarly, annuities, once purchased, remain with the consumer unless Pepperdine Public Policy Review 2013 payment is transferred to a third-party beneficiary (e.g., academic institution, spouse, grandchild, etc.).

Friedman continued his analysis of government intervention in OASI on neighborhood effects reasoning:

A possible justification on liberal principles for compulsory purchase of annuities is that the improvident will not suffer the consequence of their own action but will impose costs on others. […] We shall assist him by private and public charity. Hence the man who does not provide for his old age will become a public charge. Compelling him to buy an annuity is justified not for his own good but for the good of the rest of us” (2002, p. 188).

The difference between this argument for OASI and medical care is that hospitals and physicians are required, according to their Hippocratic Oath, to provide medical care and do no harm, regardless of financial ability to pay. Thus, if a destitute man requires emergency care but cannot pay, the hospital will deliver the minimum level of care required and the cost is initially borne by the hospital. These costs are then transferred to patients, who can afford to pay, and the government, which is then transferred to taxpayers. Thus, with respect to the federal mandate, the Affordable Care Act is an improvement because it does not require all individuals to purchase from one single national company, but allows the states to devise a local solution through insurance exchanges. Overall, the Affordable Care Act provides for insurance coverage where insurance companies would not normally provide a product. Although the individual insurance mandate is coercive in its approach, it is intended to spread the risk so that the federal government alone is not required to foot the bill.

Conclusion

The health care market in the United States is substantially flawed. The health care market can reasonably qualify as an exception to the free market rules proffered by Adam Smith and Milton Friedman, permitting government intervention in the form of the Affordable Care Act with respect to chronic and/or catastrophic care. Is the Affordable Care Act the perfect solution? Pepperdine Public Policy Review 2013

No. Was it the most practicable solution, given our democratic and capitalist principles? The

Supreme Court was divided, as are the American people and Congressional representatives at the

time the Affordable Care Act was passed.

What is the best health care system that incorporates health insurance and the provision

of medical services and products? Each citizen will have a different answer (Gratzer, 2008, p.

71). Gratzer presents his own solution, “a five-point plan for better, more affordable health

care.” First, Gratzer argues that health insurance should be made more like other types of

insurance. Second, competition should be fostered. Third, Medicaid should be reformed, using

the welfare reforms as a model. Fourth, Medicare should be revisited and revised accordingly.

And, fifth, the FDA’s size and scope should be greatly reduced and prescription drug prices

should be “addressed” (Gratzer, 2008, pp. xxi-xxii, 183-198). The Affordable Care Act dealt with most of Gratzer’s ideas, although different solutions were drafted. It is up to each state to adopt the requirements of the Affordable Care Act. Data is slowly being collected and made available to analyze what each state has adopted to meet its requirements under the Affordable

Care Act and whether those programs meet the needs of the state’s population. Almost every

American citizen agrees that the health care system is broken and unsustainable in its current form but I am confident that the American people and our democratic process will eventually provide a sustainable solution to this health care crisis.

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